Crude futures climb more than $5 as dollar sags

Natural-gas futures extend winning streak to five sessions

SAN FRANCISCO (MarketWatch) -- Crude futures logged one of their biggest one-day price moves on record Thursday, tacking on more than $5 a barrel as a steep decline in the U.S. dollar prompted oil prices to recover their recent losses and close at their highest level in over a week.

Natural-gas futures marked a five-session win -- in part, due to the dollar's weakness, but traders also remained concerned over the potential supply impact of warmer weather and Atlantic hurricanes.

The dollar "looks to be going lower," said Sean Brodrick, a contributing editor at MoneyandMarkets.com. "If the dollar is going lower, traders expect crude to go higher."

Crude oil for July delivery closed at $127.79 a barrel on the New York Mercantile Exchange, its strongest closing level since May 28.

The contract gained $5.49, or 4.5%, for the session, recouping more than $5.46 it lost in the preceding two sessions. Prices haven't scored a gain anywhere near that large in a single day since at least March 5 of this year, when they climbed $5. As far as big one-day price moves go, historical data on continuous crude futures show a drop of $5.96 on March 19 of this year and a drop of $10.56 on Jan. 17, 1991, during the Persian Gulf War.

"Today's large rally in crude prices...can be pegged to the reversal in the dollar index," said Thomas Hartmann, an analyst at Altavest Worldwide Trading.

The dollar came under severe pressure, especially against the euro, after European Central Bank President Jean-Claude Trichet said a small increase in interest rates next month is possible. See full story.

Dollar-denominated commodities, such as crude oil, tend to rise when the dollar falls, as they become cheaper for holders of other currencies.

The euro was buying $1.5593, up sharply from $1.5404 in London earlier Thursday and $1.5435 in late North American trading Wednesday. The dollar index
DXY, +0.02%
which tracks the greenback against a basket of six major currencies, was at 73.054, down from 73.469 in late North American trading Wednesday. See Currencies.

"Profit taking and/or selling in the crude market over the past week came to sudden halt and buyers stepped back to the plate based on these inflationary comments out of Europe," said Hartmann, in emailed comments.

"The price advance in crude futures accelerated after breaking yesterday's highs, likely setting off a round of frenzied buying in the last hour of trading," he explained.

"The decline in the dollar on the possibility of higher European interest rates only explains about 1/4th of today's move," said James Williams, an economist at WTRG Economics, in emailed comments. "It is clearly a market divorced from fundamental supply and demand."

Adding support were expectations of lower exports from Mexico, the third-largest supplier of imported oil to the U.S., Brodrick said in emailed comments.

Mexico's oil exports were on track to average of 1.4 million to 1.45 million barrels per day for 2008, about 15% below the goal of 1.683 million that was set in Mexico's 2008 budget, said Jesus Reyes Heroles, chief executive of Mexico's state-owned petroleum company, Petróleos Mexicanos, according to a Reuters story published on Wednesday.

Data digestion

Data from the Energy Department released Wednesday showed that crude inventories have been falling for three weeks as of May 30. However, gasoline demand has fallen 1.4% over the past four weeks, compared with the same period a year ago. Refinery activity jumped as well, lifting inventories of distillates and gasoline. See full story.

The data pushed prices Wednesday to their lowest level in a month. But "as the end of the week approaches, and more importantly $120, it should not be a surprise that the decline [in oil prices] has stalled somewhat," said John Kilduff, an analyst at MF Global, in a note to clients.

Gasoline prices remained high among consumer worries Thursday, with the average retail price for a gallon of regular gasoline at a fresh record of $3.989 Thursday, up 27% from a year ago, according to AAA's Daily Fuel Gauge Report.

Prices for July reformulated gasoline closed at $3.3345 a gallon, up 13.45 cents, after dropping 4.5% in the previous session. July heating oil finished at $3.6808 a gallon, up 13.1 cents.

Natural gas continues win streak

Prices for natural gas resumed their upward march Thursday after dropping as much as 1.4% during the session.

July natural gas closed at $12.519 per million British thermal units, up 13.9 cents. It reached a fresh contract high of $12.52 earlier in the Nymex session and climbed as high as $12.55 in electronic trading on Globex.

The contract has now gained 9.1% during its five-session winning streak.

The dollar has had an impact on natural gas prices in the past few months, said Beth Sewell, a managing partner at Quantum Gas & Power Services. "Returns are better for commodities and the margin to buy them is really low."

Meanwhile, natural-gas inventories rose by 105 billion cubic feet for the week ended May 30, the Energy Department said Thursday. Global Insight expected the data to show an increase of 100 billion, but the figure was in line with an estimate from Strategic Energy & Economic Research.

"We have the first triple-digit injection [of the season] and that may help mitigate supply concerns for next winter," said Sewell.

"Season" refers to the April 1-Oct. 31 time period during which natural-gas supplies in storage usually climb in preparation for the winter. The supply increase is also the first triple-digit rise of this year.

But the hurricane season and its potential threat to gas production in the Atlantic, and the coming hot weather this summer remain key concerns for natural-gas traders, according to Sewell.

Total natural-gas stocks in storage now stand at 1.806 trillion cubic feet, down 326 billion cubic feet from the year-ago level and 1 billion cubic feet below the five-year average, the government data said.

The Energy Department released its data five minutes later than usual, and will continue to do so until it's done adjusting its release procedures following last week's malfunction that made the petroleum supply data available before release time.

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